Global Economics

Where do iPods Cost Most -- Or Least?

Slide Show >>Ever wonder why the same products are priced differently around the U.S. and the world? Why does a 4-gigabyte iPod Nano cost $249 in the U.S., but the equivalent of $333.45 in Britain? These are virtually identical products aimed at exactly the same audience, but one costs 33.9% more.

Around the world, popular culture and brands are increasingly transnational. People in Thailand wear Levi's and eat at McDonald's (MCD) while Americans drive Toyotas (TM) and Israelis drink Bordeaux. Yet despite the fact that the world is consuming in more identical patterns than ever before, one of the ways in which nations remain distinct is in how high or low prices are on their local markets.

LOCAL ISN'T ALWAYS CHEAP. That Argentinean wine costs more in New York than Buenos Aires should come as no surprise. It has longer to travel and more associated costs in getting it to market. The same applies to oil and auto parts. In general, the closer the product is to its source, the less it will cost.

But that rationale does not apply all the time. Let's look at Apple's (AAPL) iPod again. It is made in China or Taiwan for U.S. and British markets. The costs associated with bringing it to market in either country are relatively similar. So why does one cost so much more?

A lot of it has to with tariffs -- or lack thereof -- which can affect the price. In certain countries, such as the U.S. and Britain, taxes on tobacco sales are high, doubling and even tripling the cost. In other countries, such as China, prices are fixed to hold the cost down for many products. As a spokesman for Philip Morris International wrote: "As with many consumer goods, the prices for cigarettes vary from one country to another. This reflects varying levels of consumer purchasing power in individual countries, as well as in the case of cigarettes, varying levels of tobacco excise taxation. In fact, in most countries tobacco excise taxes are the major contributor to the retail selling price."

NOT JUST TAXES. Another reason is currency valuation. Right now the U.S. dollar is weak compared with many other currencies, so it buys less. The iPod Nano may seem more expensive in some countries but in terms of actual purchasing power the outlay is comparable.

Then there is relative price structure within a country. Generally speaking, this means that for most things prices tend to be lower across the board in poorer countries and more expensive in wealthier nations. This is not always the case. In South Africa, for example, the iPod Nano retails for the equivalent of $321.77, or over $70 more than what the same unit costs in the U.S.

A fourth factor is corporate pricing strategy. According to Angus Deaton, Dwight D. Eisenhower Professor of International Affairs at Princeton University, "companies have a lot of discretion when it comes to setting prices. There is nothing to stop them setting dramatically different prices in different places in order to make the most profit."

In other words, a company will charge more for a product in one market than another because it knows consumers have no alternative. Retailers can also charge more if they feel that consumers will bear the cost.

At the same time, there are laws that prohibit people from buying, say, 1,000 cartons of Marlboros in Moscow, where the price of a pack is a little over $1, and selling them at a profit in London, where the average price of the same cigarettes is around $9. And for more sophisticated products such as automobiles and electronics, there's the warranty factor, which tends to work against profiteers mining trans-border price differentials: scoring a warranty from a respected local dealer is often worth the extra bucks.

READ THE FINE PRINT. It is also important for consumers to keep an eye on the fine print. The Manufacturer's Suggested Retail Price (MSRP) for the BMW M5 Coupe in the U.S. and China is just under $50,000. But that is before taxes and other handling charges. In China there is a 20% luxury tax on cars that have engines that are two liters in capacity or more, so the Chinese buyer ends up paying a lot more to drive his car out of the showroom.

In order to illustrate how stark the price differences can be, BusinessWeek Online identified 10 widely available consumer products that could be found in nine of the world's biggest cities: Buenos Aires, Cape Town, London, Moscow, New York, Paris, Shanghai, Tel Aviv, and Tokyo. The products ranged from common consumer goods such as a can of Coca-Cola Classic to the BMW M3. In most cases the prices cited are those that the retailer sets, which can often differ widely from the actual sale price. None of the products included sales tax although some, such as cigarettes, often had baked-in taxes.

BIG MAC INDEX. Sharp-eyed readers will notice that, like The Economist, we also included the Big Mac as one of the items on our survey. This is meant partly as a nod to their Big Mac Index, which they started in 1986, and to the fact that Big Mac remains one of the most widely known commercial food products in the world. (All Big Mac prices on BusinessWeek Online were independently reported.)

So before you complain about how things cost too much where you live, take a look at how bad -- or good -- other people around the world have it. (Click here for the slide show.)